Wednesday, 24 May 2017 – Kyahn Williamson, Head of Investor Communication
While listed Medical Technology (MedTech) companies in Australia are typically in an early stage of development with market capitalisations below $300 million, Australia’s investment market has a track record of supporting the commercialisation of some of the most successful MedTech companies in the world such as Cochlear and ResMed.
Currently there are more than 500 MedTech companies in Australia, with approximately 40 ASX listed companies in the sector. In addition to the private investment community’s support for the sector we have over the past few years also seen government support for the sector become an increasingly important political issue as the transition to an “innovation economy” becomes a reality. Initiatives such as the recently launched MTPConnect, a not-for-profit government initiative set up to fund developmental work in the medical technology and pharmaceutical sectors, is an example of the favourable regulatory and funding environment that exists for MedTech companies in Australia.
MedTech has outperformed the broader stock market in recent years
The MedTech sector can by its nature be volatile but it has, on average, delivered excellent returns for investors over the past few years. The sentiment towards the sector is currently very strong and has created a favorable market environment for smaller MedTech IPO’s and capital raisings. Outstanding longer term performers over the period such as Nanosonics and ImpediMed have helped to support the successful listing of more recent entrants such as AirXpanders and Volpara.
Since January 2014, an equally weighted index of 36 MedTech stocks with market capitalisations of greater than $20 million but less than $1 billion would have seen investors more than double their money with an average return of around 140%, compared to a 4% return from investing in the S&P /ASX 200. The broader healthcare sector has also outperformed the S&P / ASX 200 delivering a 19% return over the same period.
ASX listed MedTech stocks (ex. Cochlear) VS ASX Healthcare Index and S&P/ASX 200 (relative basis)
Source : IRESS market data, ASX MedTech includes 36 MedTech stocks with market caps >$20m and <$1b
Many of the structural drivers that have underpinned the strong performance of the healthcare sector in recent years such as changing demographic patterns as the population ages, and a blow out in government healthcare budgets, also apply to the listed MedTech sector.
Additionally, the above average returns from the listed MedTech sector have been derived from the higher risk/reward profiles that are associated with their unique technology platforms and product offerings. MedTech companies who “get it right” and successfully commercialise their products can derive incredibly high gross margins or enter into lucrative partnerships with global healthcare companies to access large markets.
MedTech : What are investors looking for?
There are a number of key themes that investors look for when assessing an investment opportunity, which companies need to address in their communication to the market:
- Product: The company’s key product offering needs to be based on an innovative technology with proven clinical benefits for patients, and with strong intellectual property protection. It needs to provide a clear differentiation from existing products in the market, or address a clear unmet need. Being able to clearly articulate both their mechanism of action, and demonstrate that they have a product that both clinicians and patients will want to use, is an important first step in building the investment proposition. This doesn’t need to be complicated – often it is the simplest solutions that carry the most impact.
- Regulatory pathway: Companies that come to market with regulatory clearances in place and are significantly de-risked will appeal to a broader group of investors. However, there is still an appetite for companies that are yet to achieve regulatory clearance, so it is important for these companies to help prospective investors understand the regulatory strategy, expected milestones and timelines to approval, and the risks. The regulatory pathway for a device, is typically faster and holds a higher likelihood of success than the pathway for drug development – and this is an important distinction to make, particularly when dealing with investors who are not deeply versed in the sector. Alongside regulatory clearance, it is also important to educate investors on the reimbursement status as this can have a major impact on eventual commercial success of a product once approved.
- Business Strategy: Perhaps what investors will want to see most evidence of is a company’s strategy and management’s ability to execute. Smaller companies will often be competing against major global players who have technologies and processes that are embedded into patient workflow already. Investors don’t just want to know that there is a significant market size, they want to understand how you intend to approach that market, what segment you will target, and the approach to bringing users (and payors) on board, plus the quality and constitution of the sales team. Also, companies must help investors understand what may not work, and how you intend to mitigate these risks. Many companies undertake a pilot commercial launch, which helps the company to refine its commercial strategy and apply its learnings in the market. Sharing this with investors can help them to better understand the strategy and expected uptake.
- Revenues: While having a product in market is a real positive, it doesn’t always equate to exponential revenue growth in the early days. Many investors are mindful of this and will wait for meaningful revenues before investing, particularly if their investment mandate prevents them from investing in smaller companies. It is important to understand these drivers from the investors’ perspective. On the flipside, it is equally important to set expectations with early stage investors on the rate of adoption and revenue growth.
With a precedent of positive investor returns and a plethora of novel technologies being developed in Australia, it’s an exciting time for the MedTech sector and investors following the space. But for many companies, the journey is only beginning and while it may be positive to have enthusiastic and supportive investors on board, you need to ensure there is a strong focus on building credibility and trust for the long term by helping them understand the journey ahead.
This article originally appeared in ‘Australasian Biotechnology’ published by AusBiotech.